A Wrench in the Wholesale Electricity Market
On September 28, 2017, the Department of Energy (DOE) issued a Notice of Proposed Rulemaking (NOPR) titled, “Grid Resiliency Pricing Rule.” This first blog in a series summarizes the NOPR and discusses the fundamental issue behind the rule:
- The DOE seeks action within 60 days (by November 27, 2017) from the Federal Energy Regulatory Commission (FERC), to establish just and reasonable rates for wholesale electricity sales to ensure certain reliability and resiliency attributes of electric generation resources are fully valued in markets. While the stated goal of the rulemaking is to improve the reliability and resiliency of the electric grid, how this is accomplished is scarcely defined. Some argue the goal of the rulemaking can be met in several other, perhaps more cost-effective and less intrusive ways.
Picking “Winners”: Coal and Nuclear
Unlike typical FERC rules, this proposed rule is both explicitly and implicitly centered around supporting coal and nuclear power plants. It states that the wholesale power markets are not adequately pricing the resiliency attributes of “fuel-secure” power. With pressure from gas plants, which have been able to bid in at low prices due to low natural gas prices, some coal and nuclear plants have not been able to remain competitive, and owners are threatening early retirement. This proposed rule excludes other resources from benefiting from other revenue streams through an arbitrary definition of eligible grid reliability and resiliency resources to have a 90-day fuel supply on site. The proposed rule does not list any evidence in support of this requirement.
Getting to the Root of Resiliency
Studies of grid resiliency have repeatedly noted the aging of the grid and the need to remain reliable and resilient, and most studies conclude that while some work remains, for the most part, the grid is structurally and operationally sound. The September DOE Staff Report on Electricity Markets and Reliability reached a similar conclusion and called for further study of wholesale markets and how generating sources are compensated. Studies have also shown that severe weather is the leading cause of power outages in the United States (Executive Office of the President, 2013), not the availability of generation or ancillary services.
Power outages are largely due to damage to transmission and distribution system infrastructure (resiliency), not the readiness of generators to provide power (reliability). Thus, the support of grid modernization efforts is better suited to improve grid resiliency than favoring older, and in the case of coal, older and less efficient generation. This includes, and is not limited to leveraging advanced distribution management systems paired with sensors across the grid to better optimize the restoration process and co-optimize demand and supply on the grid. In addition, investments in strengthened infrastructure and vegetation management programs can be effective strategies to reduce risk of damage to the transmission and distribution system. We will discuss reliability and resilience further in the next blog of the series, highlighting how this is supported by various generating technologies with unique contributions and limitations.
The focal point of this NOPR is on only select qualifying generating assets, including coal and nuclear, that are at risk of prematurely retiring due to inability to compete in wholesale markets. Recognizing that when market clearing prices were high, with gas on the margin, when gas prices were at an all-time high, these same generators were in the money as price-takers. By interfering with the wholesale market, other generation technologies may lose their ability to compete by either subsidizing coal and nuclear, or by considering coal and nuclear as must-take baseloads and reducing the wholesale market capacity. In the end, if the cost to support these generators exceeds the realized benefit of improved reliability and resilience, ratepayers (electric customers) will bear higher costs. In our next blog, we will explore how some customers may be significantly impacted due to their load characteristics (e.g. purchasing more electricity during times where coal and nuclear are setting the market clearing price).
Ultimately, the expectation that this NOPR could be implemented in the proposed timeline is unrealistic. The proposed rule lacks supporting evidence and does not articulate how these generators would be compensated. If FERC were to proceed in this direction, the compensation mechanisms to support these generators with on-site fuel supply would need to be explicitly stated, including evidence of the anticipated cost to electric customers. Without these considerations, implementing this rule could dismantle the wholesale electricity market and be more costly than beneficial to electric customers.